Does the Fed Contribute to a Political Business Cycle?

Abstract

In contrast to findings of other studies, evidence is presented to support the existence of a Federal Reserve-induced political monetary cycle that corresponds to the U.S. presidential election cycle. Using various Taylor rules, we find support for the view that Fed policy turns significantly more expansionary in the seven quarters prior to the election, but only when the Fed chair and incumbent presidential party have partisan affiliations. Copyright Springer Science+Business Media, Inc. 2006

The Fed's Real Reaction Function Monetary Policy, Inflation, Unemployment, Inequality - and Presidential Politics

“…Moreover, the idea of an "electoral business cycle" has an honorable academic history, implicating the use of Keynesian tools, especially fiscal policy, to stimulate the economy in advance of an election (Nordhaus 1974;Tufte 1978;Alesina and Sachs 1988). The idea that the Federal Reserve might engage in such behavior systematically 10 is more controversial; although it has found support in one recent paper with an approach similar to ours (Abrams and Iossifov 2006), 11 the consensus view remains adverse. Drazen (2000) provides a survey, finding no evidence of electoral cycles in real activity, inflation, money growth, or the federal funds rate.…”

Political business cycles and monetary policy revisited–an application of a two-dimensional asymmetric Taylor reaction function

“…Gamber and Hakes (1997), Abrams and Iossifov (2006) and Galbraith et al (2007) investigated this issue with respect to the US Federal Reserve. All studies can only identify a political business cycle when additionally the party in charge (democratic or republican) is taken into account.…”

Do departures from democratic accountability compromise the stability of public finances? Keynesianism, central banking, and minority governments in the Canadian system of party government, 1867–2009

“…Since the decision to tighten credit or allow inflation has a redistributive consequence for borrowers and lenders, politicians may "outsource" decisions such as these to agencies believed not to be accountable to them, to "pass the buck" in terms of perceived responsibility for politically unpopular choices. Third, given the secrecy of central bank actions and the absence of a need to provide public reasons for their actions, politicians may well believe that they can influence central bank decisions in ways that escape public scrutiny, with central bank authorities sensitive to the desires of their politicians who appointed them (Abrams and Iossifov, 2006;Abrams, 2006;.…”